There’s been an ongoing debate about whether retirees should abandon the “4% rule” for withdrawals from retirement accounts, a retirement income rule of thumb for decades. The market volatility of recent years made that rule suspect for many new retirees, but a new study from Morningstar finds that the rule can still apply.

What Is the 4% Rule?

Created in 1994 by a financial planner named William Bengen, the 4% rule posits that retirees can make a well-structured retirement fund last 30 years by withdrawing no more than 4% of the balance in the first year of retirement, then adjusting subsequent withdrawals for inflation. Bengen’s research was based on each 30-year period of market returns and conditions dating back to 1926. He found that even during the worst three decades for markets – a stretch from October 1968 to 1998 – a retiree wouldn’t run out of money.

The popularity of the rule has fluctuated, and the strategy comes with some associated criticism. That’s because during down markets the sequence of returns risk can come into play, which occurs when the first years of withdrawals take place when the value of the retirement portfolio is down. Earlier this year, personal finance expert Suze Orman argued that the rule no longer made sense and that retirees should prolong working and withdraw as little money as possible, but no more than 3%.

How Morningstar’s Study Factors In

The investment analysis firm Morningstar has examined the safe rate of withdrawal for the first year of retirement for a few years running. Morningstar’s newest research finds that with the partial recovery of stocks, withdrawing up to 4% is once again a safe starting point.

“I estimate that retirees drawing down income from an investment portfolio can now afford to withdraw as much as 4.0% as an initial spending rate, assuming a 90% probability of still having funds remaining after a 30-year time horizon,” writes Morningstar portfolio strategist Amy C. Arnott, CFA.

Morningstar’s research on the optimum initial safe withdrawal rate started in 2021 when the analysis recommended a 3.3% withdrawal rate. For 2022, that rate increased to 3.8%. The research assumes a 90% chance of success for a portfolio where stocks make up 20% to 40% of the holdings. At the end of 30 years, the portfolio would still have value.

The big factor in this year’s assessment was a change in the estimate for long-term inflation that fell to 2.42% this year against 2.84% in 2022, along with improvements in returns on fixed-income investments, such as bonds and cash accounts. The projected 30-year fixed-income returns (including cash) increased from 4.44% in 2022 to 4.81% in 2023. The study noted that while the performance of stocks has improved so far this year, the projected 30-year returns on stocks decreased this year, slipping to 9.41% from 9.88% in 2022.

The study notes that retirees who take a more flexible approach to withdrawals than a strict rate of 4% adjusted annually for inflation could be able to withdraw more money at the beginning of retirement when retirees often spend more money as they establish a new retirement lifestyle. Those retirees would need to accept that their cash withdrawals would fluctuate from year to year and that they might have less money left after 30 years.

Bottom Line

The popularity of the 4% rule comes and goes but it can be a good starting point for creating a safe strategy for retirement withdrawals. An important consideration is how much money is withdrawn in the first years of retirement, especially if the portfolio has lost value.

Retirement Planning Tips

• A financial advisor can help you build an income plan for retirement. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.

• Social Security plays a significant role in most people’s plans for retirement. SmartAsset’s Social Security calculator can help you estimate how much your benefits will be worth based on when you plan to claim them.

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